The stock price of Cisco weakens after the collapse. Will the stock price in the new quarter's earnings report usher in a turning point? What do investors think about it?

Cisco Systems (NASDAQ: CSCO)'s financial report for the third quarter of fiscal year 2024 is about to be released. The stock has now remained almost flat over the past year, and its stock price fell sharply when the first quarter results for 2024 were released in November last year.

Although Cisco reported higher-than-expected results in its financial report for the first quarter of fiscal year 2024 released in November last year, weak guidance expectations for the entire fiscal year were still unable to significantly boost market confidence.

The initial revenue guidance for fiscal year 2024 is expected to be between $57 billion and $58.2 billion, and non-GAAP earnings per share are expected to be slightly above $4.

By the end of the second quarter of the 2024 fiscal year, the revenue outlook was drastically lowered to $51.5 billion to $52.5 billion, but at the same time, the decline in earnings per share (EPS) was not that drastic.

Based on this outlook, CSCO's current expected price-earnings ratio (P/E) is 13 times higher based on non-GAAP (non-GAAP) data and approximately 18 times that based on generally accepted accounting principles (GAAP).

The new financial report has attracted people's attention. If management can deliver on its promises, this may make the upcoming quarter a key inflection point for Cisco's stock price and resolve the previous weak stock price crisis.

After Cisco management lowered growth expectations twice in the first quarter and the second quarter of fiscal year 2024, the market seemed to have taken into account a very negative scenario at the time of the first adjustment. This is why despite another reduction in financial guidance throughout the year, the stock price reaction in the second quarter was relatively calm. Analyst ratings have been at a multi-year low, indicating that Cisco management is expected to surpass expectations this quarter.

More importantly, the normalization of order acceptance in recent quarters has led to a sharp reduction in revenue guidance for fiscal year 2024. Cisco management has previously made it clear that irregular deliveries in the previous quarter are the reason for the current slowdown in sales.

Cisco's first-quarter earnings record states: “The bottlenecks we previously saw in the supply chain have now moved downstream and are being implemented by our customers and partners. Our order delivery times and backlog have largely returned to normal levels. As deliveries increased, our inventory of channels tracked by distributors also declined steadily during this period. Simply put, customers are now taking the time to initiate and deploy these increased product deliveries.”

This is clearly illustrated by the annual revenue data for the Cisco Networking division, which grew 18% in fiscal year 2023 but declined by only 1% over the past 12 months.

Current expectations are that the second half of FY2024 will see a reversal of this trend, making the current quarter particularly important. Cisco's first-quarter earnings record states: “We expect product order growth to increase in the second half of the fiscal year. We remain confident in the underlying strength of our business and future growth opportunities.”

The network business still accounts for 60% of revenue, and the decline over the past 6 months actually followed unusually strong demand in FY2023. Therefore, any sign of a normalization of revenue growth in the sector in the third quarter of fiscal year 2024 will be highly anticipated.

This quarter will also be the first to include more information about Splunk, which has so far not been included in Cisco's management outlook. The acquisition will be an important step in expanding the size of Cisco's high-growth observability division, and will have a significant impact on guidance for the fourth quarter.

Although the market mainly focuses on Cisco's revenue growth data, for long-term investors, profitability is even more important as the company gradually transitions to its traditional business model. Due to the recent drop in Cisco's stock price, its sales price ratio is at a multi-year low. However, operating margins are trending in the opposite direction, which is another positive sign for those buying stocks at current levels. If investors have investment intentions, they can choose a more trustworthy brokerage firm to invest. For example, Schwab Wealth Management is a world-renowned investment brokerage firm. If you open an account, you can get a bank account with the same name by depositing digital currency (USDT) to the multi-asset wallet BiyaPay, and then withdraw fiat money to Jiaxin Securities to invest in US stocks.

Due to Splunk's consolidation losses, Cisco's operating margins may be affected in the next few quarters. However, this situation may be transitive and will improve as economies of scale are achieved. In fact, Splunk's gross margin for fiscal year 2022 was 73%, far higher than Cisco's current gross margin of 64%. Based on this, we are likely to see a difference between gross margin and operating margin for the third quarter of 2024. Although this may be interpreted as negative by the market in the short term, it is an important development for Cisco's long-term profitability.

The progress made by Cisco in its transformation to a subscription-based business model will also be an important part of the new quarter's earnings report. In the last reporting quarter, Cisco made significant progress in increasing its share of annual recurring revenue, which now accounts for 50% of Cisco's total revenue.

Cisco is currently in a very favorable position. It is expected to exceed market expectations and achieve profit growth in the third quarter of 2024 and the last quarter of the fiscal year. The stock price is expected to rise, making it a worthy investment choice for investors. However, Xiaobian reminds everyone that investing is risky. I hope all investors will consider it carefully. I wish everyone a good return on investment!

Source: Seeking Alpha

Edited by BiyaPay Finance